Stock Market Fortune Cookie

Stock Market Fortune Cookie by bransorem

It looks to be a rocky start to the new week in the world financial markets. Major stock indexes in Europe plunged between 2.42% and 4.57% in trading there. What is the big driver of this new sell off? The renewed fear of a Greek debt default and all that would mean for European banks that have large amounts of Greek bonds on their balance sheets.

The slowly dawning realization that no amount of austerity is going to allow the Greek government to cover its financial commitments and a growing reluctance by the German government to even try is putting a fairly panicked patina on the world markets.

It is not like this is really that unexpected. The problem is that as the Greek government has slashed spending and wages and hours, their economy has slowed down. The unemployment rate in Greece has is nearly 16% and that only counts those who are looking for work, not so-called discouraged workers.

With that level of unemployment any cuts in demand just wind up as more unemployed workers who can’t afford to spend very much. This means there is less tax collected, less production needed and more people are likely to be laid off.

The next logical step for Greece is to default on its debt. This could be good for Greece in the long run, but in the short run it is likely to make the Euro Zone a really unhappy place. The index that lost the most value today was the French CAC. This is because Frances three largest banks are major holders of Greek debt. All three are expected to be down graded by credit rating agencies some time this week for this very reason.

If this seems familiar it is because it is very similar to the way that our own housing bubble collapse played out. Risky debt began to become a liability and the amount of it in the hands of US and other nations banks threatened to rob them of the liquidity they needed and make it nearly impossible for them to borrow money short term.

That it is happening to the second strongest economy in the Euro Zone is making a lot of investors nervous, and with good reason. The Washington Post quoted the German Finance Minister as saying:

“To stabilize the euro, we must not take anything off the table in the short run,” Roesler told Germany’s Die Welt newspaper. “That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.”

That someone other than the Greek government is talking about default is a pretty strong sign that if you hold Greek bonds, you are likely to take some sharp losses in the coming weeks. Once that kind of genie is let out of the bottle it is nearly impossible to put it back in.

In addition to talking about default the Germans are talking about consequences of such a move by the Greek government. One of the most severe would be kicking the Greeks out of the Euro Zone currency agreement and forcing them to return to their old currency the drachma. This would be akin to throwing a passenger in a sled out to the pursuing wolves.

Even if the Euro Zone nations do that that step, it is unknown if they will be able to stabilize their currency. After all Spain, Italy and Ireland are all reeling from their own credit crisis’s. Just cutting Greece loose dose not stop the losses on the government bonds, it just takes some pressure off of the Euro.

For us here in the United States this could be bad news in a couple of forms. The first is rather obvious; a collapsing Euro Zone means that there are fewer markets for our products which exacerbate our own demand problems.

The other is that we will hear, interminably and ad nauseum, from conservative politicians that we need to enact our own extended austerity measures, above and beyond the ill conceived and ill timed Super Committee cuts to avoid becoming like Greece.

They will, of course, miss the point that our problem is not that business is uncertain about regulation or taxes ,but that there are not enough buyers for their products to put more people to work. It becomes a vicious circle, where cutting spending cuts demand, and engenders calls for more cuts in spending.

Is there a global solution to this mess? I don’t know. There are so many varied interests and view on this topic that it might just be that we have live through the consequences of the original failure to properly regulate the financial industry on a world wide scale.

Nations are still coming to the terms with the idea that maybe it is just not worth it to let the people who put us in this mess actually get the monies promised them by the loans that are going bad. After all, investment is supposed to be about risk and even with credit rating agencies there is always a chance that you will loose your shirt if things go bad.

The fact that we don’t have a system that rates the judgment of these credit ratings agencies is a problem as well. Really, how much do you trust S&P whose analysis says that bundled mortgages are a better risk right now than a US Treasury bond?

I am generally not one to call for radical change, mostly because radical change often throws the baby out with the bath water in a desire for a clean slate restart. That said it seems to me that we have ample evidence that our system of finance is broken and must be addressed a root cause level if we are to have the kind of stable flow of capital that our global financial system is based on.

What form that takes, I am not ready to prescribe, but I would say we must regulate banking more closely. The belief that an innovative market is always going to make money and make everyone prosperous has been shown to be a fraud and we should not pursue that path anymore.

So it will be another interesting day on the markets. Interesting in the sense of the Chinese curse that is.

The floor is yours.

Bill Egnor

Bill Egnor

I am a life long Democrat from a political family. Work wise I am a Six Sigma Black Belt (process improvement project manager) and Freelance reporter for